The Bank of England will scrutinize the CPI figure carefully when contemplating a potential interest rate cut.
In March, the UK’s annual inflation rate declined for the second consecutive month, reaching 3.2% – its lowest level in two and a half years. This drop provides some relief for households grappling with the cost of living crisis.
According to data from the Office for National Statistics (ONS), inflation persisted in its descent from 3.4% in February, with food prices experiencing a slower increase compared to the previous year. City economists and the Bank of England had anticipated a slightly steeper decline to 3.1%.
The last instance of inflation, as gauged by the consumer prices index, being lower occurred in September 2021, registering at 3.1%. It’s important to note that a decrease in the inflation rate doesn’t imply that prices are decreasing; rather, they are increasing at a slower pace.
Rachel Reeves, the shadow chancellor, remarked, “Conservative ministers will be hitting the airwaves today to tell the British people that they have never had it so good. However, after 14 years of economic failure under the Conservatives, working people are worse off.”
“Prices are still high in the shops, monthly mortgage bills are going up, and inflation is still higher than the Bank of England’s target.”
Chancellor Jeremy Hunt stated, “The plan is working: inflation is falling faster than expected, down from over 11% to 3.2%, the lowest level in nearly two and a half years, helping people’s money go further.”
The ONS attributed the largest contribution to the decline in inflation to cooling prices in food and drink. Prices of certain bakery items, such as chocolate biscuits and crumpets, decreased between February and March, contrasting with a rise during the same period last year.
In total, food prices saw a 4% increase, a notable decrease from the peak of 19.1% in March 2023, marking the highest food and drink inflation since the late 1970s.
As the Bank of England contemplates the timing of its first interest rate cut since the 2008 financial crisis, prompted by the need to counteract surging inflation, recent data presents a nuanced picture. The metric for the annual rise in living costs peaked at 11.1% in October 2022, a 41-year high fueled by the Covid pandemic and Russia’s invasion of Ukraine.
Meanwhile, core inflation, excluding energy, food, and tobacco prices – a key gauge closely monitored by the Bank – moderated to 4.2% from 4.5% in February, albeit slightly higher than anticipated by financial analysts. Additionally, services inflation, another crucial indicator for the Bank, saw a minor easing to 6% from 6.1% the previous month, according to the ONS.
Economists anticipate a further downturn in inflation for April, potentially dipping below the Bank of England’s 2% target, driven by a significant reduction in household energy costs to their lowest level in two years.
Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, highlighted the imminent landmark decline in inflation for April. Lower energy bills resulting from the reduction in Ofgem’s energy price cap are expected to push the headline rate below the Bank of England’s target.
While the March inflation drop might not immediately prompt an interest rate cut next month, Thiru suggested that the outcome could sway more rate setters to vote in favor of loosening policy, signaling that rate cuts are on the horizon.
